The housing market is not going to bounce back because there’s a huge pipeline of severely delinquent and underwater mortgages out there that still haven’t been absorbed by the market.

Courtesy of the NY Fed, here’s concrete proof banks are sitting on huge numbers of bad loans rather than foreclosing and letting them hit the market. (Ignore the data for 2006: there were few foreclosures back then. Focus on the early 2007 to early 2009 trend.)

This first set of graphs shows the probability that once a borrower goes 60 days late, he then fails to make his next payment and goes 90 days late:

Note the percentage of supposedly “near-prime” Alt-A loans where a 60-day-late borrower cures has plunged from 25% to 5%. The percentage of delinquent loans that get repaid in full because of a refinancing (in yellow) has also dropped from low to virtually zero.

So we see once borrowers miss a couple payments they have no ability or no intention to get current.

You’d expect, with this trend, for banks to then be more aggressive about foreclosing on seriously delinquent mortgagers. Yet we see the opposite: The next set shows what banks do for loans than are 90+ days delinquent.

So banks have gone from foreclosing on about 45% of their severely delinquent Alt-A loans each month to 20%.

So if you own a house that’s underwater, in practice you can probably keep living there (or collecting rent payments) for a year or so without making payments to the bank. You have 3 months before the loan is bad enough for the bank to foreclose, around 3 more months before the bank starts the foreclosure process and who knows how much longer before the bank actually moves to take possession of your home.

On that last point, the next graph shows the declining percentage of Alt-A loans in the foreclosure process that resolve out of foreclosure (i.e., short sale or refinance) and the likewise declining percentage of these loans banks are taking possession of:

Finally we see soaring losses on first mortgages:

This would be much worse if you included second mortgages, and worse still if banks weren’t propping up the market by sitting on bad loans. Worse still, banks are sitting on bad loans in the weakest markets the longest.

Bottom line, U.S. banks are still not owning up to their bad mortgage debt. Our government is turning a blind eye hoping the problem will go away. It won’t. This policy was tried and failed in Japan, where the economy never really recovered.

In fact, the Japanese stock market lower now than it was 24 years ago in 1985:

An article focusing on Riverside and San Bernardino’s problems is here:

The highlights are grim:

With 11,485 foreclosure-related filings last month, Riverside County ranked fourth nationally in foreclosure activity, with one filing for every 64 households. San Bernardino County ranked sixth with 9,651 filings, or one for every 69 households.

In Riverside County, total foreclosure-related filings were up 58 percent from a year ago and 39 percent from July, while in San Bernardino County, total filings increased 98 percent from August 2007 and 34 percent from the month before.

Most of the growth was in bank repossessions. There were 4,165 in Riverside County, up 248 percent from a year earlier, and 3,172 in San Bernardino County, up 348 percent.

Median income in Chula Vista’s 91914 zip code is above the national average. The problem, however, is that it’s not far enough above the average to support the insanely high prices of the 2003-2007 bubble years. Banks that loaned money for purchase of these homes during this time have only just began reporting what will turn out to be many millions of losses from these loans. Of course many of these loans ended up in mortgage-backed securities. Investors in these instruments also will lose millions, just from this single, lightly populated suburban zip code. Here is a small sample of the losses. All of these are either foreclosures or short sales:

San Marcos is one of the older cities in San Diego’s North County region, with a historic downtown. Nonetheless it has experienced rapid residential and commercial development, doubling in population from 39,000 in 1990 to about 78,000 today. Its population roughly mirrors the rest of San Diego, with a median family income of $75,860 ($6,000 higher than the US average) and 9.8% of families below the poverty line.

San Ysidro is located about 15 minutes south of Downtown San Diego and the last neighborhood before the US/Mexico border station. Washington Mutual (WaMu) seems to be the major mortgage bank serving this region.

As ugly as the market looks from these big losses, a lot of these are closed sales that were priced in 2007 or REOs where the borrower fell behind 4-10 months ago. In other words, they reflect 2007’s economic problems, before the economy was in a recession. As 2008 wears on, these numbers will get much worse.

Don’t miss the sneak preview at the end of this post of my forthcoming look at the market in San Marcos, a middle-class suburb and college town in northern San Diego county.

2 bed/2 bath Condo at Villa Serena

Sold 6/06 293K

Bank owned foreclosure for sale now at @110K

-$183,000 (-62%) drop

3 bed/2 bath condo on San Ysidro Blvd

Sold 1/06 360K

For sale @ 154.9K

-$205,100 (-57%) drop

15xx Smyth Ave 3 bed 2.5 bath

Sold 6/05 $385K

For sale @ $199

-$186,000 (-48%) drop

Sunset Village #6X (1 bed unit includes new granite/maple/chrome kitchen, patio, and fireplace)

Escondido is has a population of 133,000, making it the 4th largest city in San Diego County and 178th largest city in the USA. As you can see from the examples below, price drops of 40% or more are getting very common. And remember these aren’t even 40%+ drops from the absolute peak of the bubble, but from sales in 2004. So these losses may be excluding 2nd mortgages written off due to short sales or banks deciding to eat losses rather than pursue deficiency judgments.